In 2010, Maria Gotsch (MBA 1989) called a meeting with the chief information and technology officers at five of the largest banks headquartered in Manhattan. The session would last for three hours, but as Gotsch recalls, the executives in the room barely glanced at their phones. They were too intent on what Gotsch and her colleague, a senior capital markets consultant at Accenture, had to say—or more precisely, what they had come to ask: Where, exactly, do you look for new and innovative financial technology?

The response was quick, blunt, and unanimous. “Every single person in that room said California, Boston, sometimes London,” recalls Gotsch. “Nobody was looking locally.”

Gotsch is president and CEO of the Partnership Fund for New York City, which invests in local ventures to create jobs and grow the Big Apple’s economy. (The Fund is the investment arm of the Partnership for New York City, a nonprofit composed of some of the city’s largest private firms.) As a result, she is always on the lookout for sectors that the city ought to dominate but doesn’t.

Eight years ago, the sector in Gotsch’s sights was fintech—a once obscure but now ubiquitous phenomenon that is revolutionizing everything from online payments and wealth management to cybersecurity and insurance through digital technologies as diverse as blockchain and artificial intelligence. Despite being the world’s financial capital and home to an otherwise robust technology sector, New York had yet to become a major player on the fintech scene.

Today, the situation could not be more different. Thanks in part to Gotsch’s efforts, which led to the establishment of the FinTech Innovation Lab (FIL)—an über-accelerator jointly run by the Fund and Accenture that turns out market-ready fintech startups the way a bakery cranks out cookies—New York now holds a demonstrable lead over Silicon Valley in terms of fintech investment in the United States. According to CB Insights, a New York startup that uses algorithms to collect and analyze data on private firms, VC-backed fintechs in Silicon Valley raised $1.3 billion in equity financing in 2017, while their Silicon Alley cousins raised $1.5 billion, or 15 percent more. (CB Insights was in the first FIL graduating class.) The total number of equity financings was higher, as well, with 122 in New York versus 70 in the Valley.

And the story of how New York came to realize its potential as a fintech hub is a blueprint—offering concrete lessons about how cities can build their own entrepreneurial ecosystem from scratch.

GOTSCH: “Large financial institutions are technology companies that happen to move money. Technology is core to what they do, and it has been core to what they do forever.” (photo by Chris Sorensen)

GOTSCH: “Large financial institutions are technology companies that happen to move money. Technology is core to what they do, and it has been core to what they do forever.” (photo by Chris Sorensen)

On paper, New York City should have dominated fintech from day one. It has a high concentration of financial services, e-commerce, and information technology companies, as well as in complementary areas such as marketing, branding, and design—all of which can help nascent businesses gain a foothold in the marketplace.

Plus, the way fintech straddles the broader technology and financial services industries gives New York a significant competitive advantage. The sector’s unique hybrid status means that new entrants require not only the standard mix of tech and business savvy vital to the success of any startup, but also a high degree of what Gotsch calls “domain expertise” in financial services—a highly technical and tightly regulated industry containing a number of distinct verticals, from capital markets to asset management and lending.

Few cities on earth can boast a talent pool with quite as much relevant domain expertise as New York, which is exactly why Gotsch identified it as a prime candidate for fintech dominance—that, coupled with an established venture capital community and a vast pool of potential customers in the form of major financial firms hungry for fresh tech. “Large financial institutions are technology companies that happen to move money,” Gotsch says. “Technology is core to what they do, and it has been core to what they do forever.”

New York even had parts of the proper ecosystem already in place. As HBS professor Josh Lerner, an authority on entrepreneurship and venture capital around the globe, points out, many different actors must come together to form an entrepreneurial ecosystem, from risk-taking founders to the angel investors willing to gamble on them to the service providers—e.g., real estate agents, lawyers—willing to work with them as they struggle to build their businesses. “It’s a complicated array of people, which is why it can be difficult,” he says. New York already had some of those elements, thanks to the dot-com boom of the 1990s, which yielded a number of prominent media and ad tech startups along with various companies focused on financial data and internet-based trading.

And yet, even with many of the necessary pieces in place, the NYC fintech scene of the early 2000s just wasn’t catching fire. What was missing? Turns out, all it needed was a match.

Nearly a decade ago, when Niko Karvounis (MBA 2011) and Lowell Putnam first began batting around the idea of founding Quovo, which would allow banks, investment advisors, and other service providers to connect and analyze customer financial accounts, there was virtually no fintech support system in place in New York: no close-knit community of potential investors, employees, and customers they could tap for money, talent, or pilot projects. The big banks and insurers that have since signed up as customers weren’t interested in them, and the lack of an ecosystem made the process of securing seed funding extremely challenging. (They eventually raised more than $6 million in seed and first-round funding, and received an additional $10 million in venture capital last year.)

In part, that was because Wall Street had long maintained well-funded IT departments that soaked up much of the financially savvy talent who would otherwise have entered the entrepreneurial ecosystem—a byproduct not only of the big firms’ appetite for technology, but also of their aversion at the time to acquiring it through potentially risky partnerships with innovative upstarts. And in part it was because B2B fintech, which is where much of the action in New York tends to be, is an inherently tough sector to break into: Startups must satisfy the same regulatory and security requirements as their corporate customers, and building the kind of credibility that a top-five bank or insurance company wants in a vendor takes time. As a result, says Karvounis, “There aren’t that many overnight successes.”

And that deficit can be crippling. As Walt Frye (MBA 2000), an angel investor and fintech startup mentor in Charlotte, North Carolina—itself a burgeoning fintech hub—puts it: “Density breeds success.” Consequently, the fintech startup community in New York was for many years self-limiting, its small size and slow growth preventing it from achieving critical mass.

Ironically, it was the financial crisis of 2008 that gave the city’s fintech scene the jolt it needed to reach the next level. Suddenly, the big banks had much less money to throw at internal R&D, and as they scaled back their operations, their old technology vendors took a hit as well. That opened the field to nimbler startups with innovative ideas, says Brooks Gibbins (PMD 77, 2002), a software developer-turned-entrepreneur-turned-venture capitalist who in 2013 cofounded New York–based FinTech Collective, which provides early-stage funding for fintech startups. (FinTech Collective led the Series A financing for Quovo.) This opening resulted in what Gibbins describes as a gradual externalization of R&D at the major firms.

Gotsch, who is not one to miss an opportunity—“never let a good crisis go to waste,” she says—seized on that changing picture to offer the city’s big banks a proposal: With their support, the Fund and Accenture would establish an accelerator for fintech startups that would allow financial services institutions to shop locally for innovative tech, rather than having to seek it in California, Massachusetts, or the UK.

Since 2010, the FIL has signed up 43 institutional partners and roughly the same number of entrepreneur mentors and venture capitalists. More importantly, it has helped birth 47 companies that have gone on to raise $531 million in VC financing. And its success has paved the way for the creation of other, similar programs, like the Barclays Accelerator and Startupbootcamp FinTech New York.

The model has an annual cycle, beginning with a selection panel (made up of leading financial institutions) that chooses a small cohort of startups from a large pool of applicants. Participants are placed in direct contact with executives from the lab’s partner institutions along with mentors and VCs. That cast of characters plays a variety of roles. The financial institutions represent potential customers that can give the startup founders direct feedback on their products, in some cases literally telling them how their technology might be of use to a large bank or insurer—or why it wouldn’t be attractive in its existing form, but could be with some tweaking.

The entrepreneur mentors and VCs, meanwhile, offer skills, insights, and perspectives that first-time founders often lack—from realistically analyzing the size of their addressable markets, to figuring out how they will scale their businesses to satisfy demand.

And members of all three groups can serve as resources well beyond the program itself, investing in the startups they have advised, serving on their boards, and connecting them to others in their personal networks.

Over the past eight years, the FIL has played a crucial role in building what HBS professor of management practice Mitch Weiss calls a city’s “innovation infrastructure.” In previous eras, that might have meant investing in roads or waterways, says Weiss, who helped jump-start Boston’s startup scene as chief of staff to former mayor Thomas Menino. But today, that means creating opportunities for all the key actors within an entrepreneurial ecosystem to come together, enabling startup founders to connect with the advisors, investors, and customers they need to survive.

Gotsch views her approach to nurturing fintech in New York as a replicable model of ecosystem development that could be applied anywhere, and to any industry.

Gotsch views her approach to nurturing fintech in New York as a replicable model of ecosystem development that could be applied anywhere, and to any industry.

That kind of infrastructure can look very different from place to place. In Boston, it took the shape of District Hall, a public venue in the city’s Seaport District that functions as a communal gathering place for entrepreneurs and other members of the local ecosystem. In Charlotte, it took the form of the Carolina Fintech Hub, a membership organization that connects startups to incumbents like Bank of America and Wells Fargo; and Innovate Charlotte, a public-private partnership directed by Walt Frye that aims to provide startups of all kinds with access to resources within the larger entrepreneurial ecosystem. “We are leveraging these partnerships to provide fuel for the ecosystem,” says Frye, who describes both organizations as bridges that link startups to established companies, enabling access to everything from financial expertise to data and capital.

That virtuous cycle of spinouts, reinvestment, and serial entrepreneurship—what Frye refers to as the “wash, rinse, and repeat” of a healthy ecosystem—yields greater density and even more connections, ultimately giving rise to a fully sustainable business environment. “You have to start to see entrepreneurs graduating from opportunities, coming back into the ecosystem, and starting additional opportunities,” says Brooks Gibbins, who has done precisely that.

Gotsch considers the approach she took to nurturing fintech in New York—identifying a sector where the city possessed clear advantages and establishing a platform for building relationships among the relevant actors—to be a replicable model of ecosystem development that could be applied anywhere, and to any industry. (At the moment, she is attempting to strike gold twice in one place by boosting New York’s biotech sector, which has historically lagged behind that of California and Massachusetts despite the presence of numerous drug companies and medical research institutions.) And she is not alone: Endeavor Insight, a nonprofit research outfit that examines the growth of entrepreneurship around the world, suggests that building a new sector on top of existing infrastructure and industries is in fact the best way for a city to accelerate the growth of an entrepreneurial ecosystem—better by far than attempting to replicate the Silicon Valley model, which developed organically over the course of several decades and required inventing many of the core digital technologies of the past half-century.

But it is by no means the only way to support the growth of an entrepreneurial ecosystem.

Universities, for example, play a crucial role in training the engineers upon which startups rely. Unlike Boston or Silicon Valley, however, New York has historically lacked a top engineering school, and has had to rely on talent imported from elsewhere.

In 2010—the same year that Gotsch cofounded the FIL—the administration of Mayor Michael Bloomberg (MBA 1966) launched a competition that ultimately led to the creation of Cornell Tech, an engineering campus established by Cornell University and the Technion-Israel Institute of Technology on Roosevelt Island in Manhattan. Construction won’t be complete until 2037, but the doors are already open on the first phase; and once it is operating at full capacity, the school, which is dedicated to churning out homegrown entrepreneurial techies, ought to turbocharge the local startup scene.

According to Josh Lerner, government also plays an important role in fostering healthy entrepreneurial ecosystems by doing things like promulgating favorable tax policies for investors and encouraging labor market mobility. “Setting the table in terms of creating an environment that is attractive to entrepreneurship is one of the most important things that government can do,” he says—and differences in incentives and regulations can have a significant impact. For example, non-compete clauses are only narrowly enforced in the state of New York, making it relatively easy for an employee of a large financial services institution to leave and found a startup. This puts it ahead of Massachusetts, which takes a stricter stance on such restrictive covenants, but behind California, where they are banned entirely.

The precise mix of initiatives, policies, and pre-existing strengths will differ from place to place. But that isn’t necessarily a problem. It just means that no two ecosystems will look exactly alike. “Our fintech sector will never be like New York’s or San Francisco’s or Austin’s,” says Frye, in Charlotte. “But we do have assets we can build on to really accelerate our ability to be effective and to grow.”

Of course, the race to dominate financial technology is not confined to the United States, and more than a few other countries have become well-versed in the art of ecosystem development. Indeed, when it comes to setting the table for fintech, America’s foreign rivals might just have it beat.

In 2015, then British prime minister David Cameron announced that he wanted to make the UK the world leader in fintech, appointing a special envoy responsible for promoting the sector at home and abroad. The following year, the country’s Financial Conduct Authority built a “regulatory sandbox” where fintech startups can test new products and services on real consumers without fear of regulatory reprisal. Investors appear to have noticed: Venture capital investment in UK fintech doubled between 2016 and 2017, reaching an all-time high of $1.6 billion.

CB Insights reports that 3 out of the top 10 global fintech deals in 2017 involved Chinese companies, while the 5 largest investor-backed fintech IPOs that year were driven by Chinese firms.

CB Insights reports that 3 out of the top 10 global fintech deals in 2017 involved Chinese companies, while the 5 largest investor-backed fintech IPOs that year were driven by Chinese firms.

China, meanwhile, would appear to be a giant regulatory sandbox: a vast and largely unprotected marketplace of underbanked, smartphone-wielding digital natives who are ready and willing to conduct their financial transactions via app. “The fintech companies operating in China have the benefit of a fully converted digital society that is near limitless in size and has limited regulatory barriers,” says Brooks Gibbins. The country’s main financial regulator, the People’s Bank of China, has made noises recently about exerting greater control over the sector. But for the time being, China remains the wild west of fintech experimentation, leading Gibbins to deem it the perfect environment for testing the delivery of financial services and products.

The resulting fintech activity has been nothing short of spectacular. CB Insights reports that 3 out of the top 10 global fintech deals in 2017 involved Chinese companies, while the 5 largest investor-backed fintech IPOs that year were driven by Chinese firms. And it estimates that Ant Financial, the fintech arm of the Alibaba Group, has approximately 1.5 billion users across its various platforms—a number that exceeds the combined populations of North America and Western Europe. (With a valuation of $60 billion, Ant is also the world’s largest “unicorn.”)

The British and Chinese cases, coupled with the worldwide reach of venture capital and the international aspirations of many fintech businesses (CB Insights predicts that European fintechs will expand their global footprint in 2018, even as American companies look abroad for opportunities), suggest that the very notion of a single fintech capital—whether it be New York or London, Beijing or the Bay Area—may be misplaced.

Instead, the future of fintech may resemble what Gibbins describes as a global network of distributed ecosystems, each with its own individual strengths, and all collaborating with one another.

It’s a vision that Walt Frye shares.

“Oftentimes, we operate as if we are isolated ecosystems,” he says. “But we really should create and develop connections so that we’re sharing the best of talent, perspective, and capital across the country, if not the world.”

But Maria Gotsch, who did not establish the FIL to make New York only one of many coequal centers, remains undaunted in her quest to turn the city into the undisputed global front-runner in fintech.